Short Duration Contract Disclosures Effective Now
Published January 19, 2018
The Accounting Standards Update No. 2015-09 “Financial Services – Insurance (Topic 944), Disclosure about Short-Duration Contracts,” provides updated guidance on enhanced disclosure requirements for short-duration insurance contracts. This guidance is effective for private (“non-public”) U.S. GAAP reporting entities for their December 31, 2017 financial statements (was effective for public business entities in 2016). For private entities, the adoption will significantly impact the disclosures in your December 31, 2017 GAAP financial statements.
MCM has developed a template to assist insurance companies with their preparation of the enhanced disclosures. The template assists with ensuring the disclosure of incurred and paid claims development information reconciles to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses correctly. The template also provides example disclosure wording regarding the significant accounting policies and reserving methodologies. Contact Marcus Bickwermert (502.882.4412) or Wes Vance (502.882.4378) for a copy of the template.
The purpose of the new standard is to provide financial statement users with more transparent information about an insurance entity’s most significant liability recorded, the liability for unpaid claims and claim adjustment expenses. Companies will now disclose dramatic detail in order to provide users with an understanding of cash flows and financial impacts of claims and to help readers assess an entity’s ability to underwrite and anticipate costs associated with claims.
Aggregation of Claims Data Being Disclosed
Consideration should be given to the level of aggregation or disaggregation of data based on specific disclosures so that useful information is not obscured by either the inclusion of a large amount of insignificant detail or the aggregation of items that have significantly different characteristics. The level of aggregation should allow users to understand the amount, timing, and uncertainty of cash flows arising from contracts issued by insurance entities. When selecting the type of category to use to aggregate or disaggregate disclosure information, consider how information about the liability for unpaid claims and claim adjustment expenses has been presented for other purposes, such as information regularly reviewed by decision makers of your organization. Examples of categories for aggregating information for the new disclosures might include types of coverages provided, geography of the coverages offered, claim durations or type of customers, among others.
Claims Development Data – What Time Periods to Include?
The disclosure information related to claims development by accident year should present information for the number of years for which reported claims typically remain outstanding, not to exceed 10 years (including the most recent reporting period presented), i.e. the average number of years between claim incurred date to payment date. Companies are allowed a practical expedient when deciding the number of years to present (not to exceed five years of data if presenting previous years’ information is impracticable) but will need to add additional years as future data becomes available if the initial presentation is less than 10 years.
How Dramatic of a Change in Disclosure is this?
This represents a significant change in the amount of information to be disclosed in your U.S. GAAP financial statements. Previously, insurance entities were generally only required to disclose key summary data, on a net of reinsurance basis:
- A roll-forward of the dollar amount of claims activity for the company in total;
- To disclose the impact on current year earnings from changes in estimates made relative to prior years’ estimates (redundancies or deficiencies in prior year estimates using current data);
- If you discounted reserves (generally limited to Workers’ Compensation and some other long tail liability coverages), the discount rate utilized;
- And any other significant changes and assumptions related to the company’s estimate for benefits and claims liability recorded that would be relevant to a reader.
Entities are now required to disclose dramatically more information and in more detail, as well as provide for disclosure of matters such as claim frequency (quantitative and qualitative information frequency information), a description of reserving methodologies, significant changes in methodologies or assumptions and reasons for such changes as well as disclosed IBNR (incurred but not reported) claims reserve information.
In addition, entities will need to determine the presentation for cumulative claim frequency information, unless it is impracticable to do so. The recommended approach is using the number of reported claims. If it is impracticable to disclose claim frequency information the entity shall disclose that fact and explain why the disclosure is impracticable.
Lastly, most auditors will be labeling the information provided in the disclosures in tabular form as “unaudited,” except for the most recent year and it is considered supplementary information.
Do Captives Need to Comply?
Insurance companies that produce or file U.S. GAAP financial statements are required to comply with this new disclosure requirement. However, for captives domiciled in Kentucky, we are aware that the Department of Insurance (KDOI) has provided for a process for captive insurance companies to file a request for a waiver that would exempt the captive from including the information required by ASU 2015-09 for U.S. GAAP basis financial statements filed with the KDOI. Captives established and operating as a Reciprocal Risk Retention Group (RRG) are not eligible to request this waiver.
If a waiver is granted, auditors of the captive insurance entity will be required to issue a qualified opinion relative to the disclosures required (and not provided by the captive) under ASU 2015-09 (“except for” opinion). This is similar to the opinion included on captives that currently include Letters of Credit as part of their capital structure under the respective Kentucky captive statutes.